America’s Auto Sector Says Thank You to Mr. Bernanke

The impact of the Federal Reserve’s low interest rates and easy monetary policy can be seen everywhere. The housing sector is seeing another boom thanks to the Federal Reserve. So is the retail sector and consumer spending, in spite of the fact that jobs growth is not at pre-recession levels. The Dow and the S&P 500 also achieved more records on Tuesday. Again, the stock market wealth and all of the 300,000 or so newly minted millionaires have the Federal Reserve to thank.

On Tuesday, the automobile sector joined in on the fun, as easy money and cheap financing rates for new vehicles helped to drive up sales to the highest levels since 2007.

At Ford Motor Company (NYSE/F), sales increased six percent to 236,160 vehicles sold in March, while at General Motors Company (NYSE/GM), sales jumped 6.4% to 245,950 in March.

You can get a 60-month financing term for a new vehicle for as little as 2.24% at the Bank of America Corporation (NYSE/BAC) and 2.69% at Capital One Financial Corporation (NYSE/COF). (Source: “Auto Loan Rates,” My Bank Tracker web site, last accessed April 2, 2013.) The average 60-month rate is around 4.12%, according to Bankrate.com, down from 4.52% a year ago.

You can also thank President Obama for helping to save the auto sector, as the move is apparently paying dividends.

While the renewed spending across America is good for the economic recovery, you kind of have to wonder about the ramifications down the road, when interest rates begin to ratchet higher.

Some members of the Federal Reserve are already beginning to voice their opinion to start reducing the amount of bond-buying from the current $85.0 billion monthly.

Richard Fisher, President of the Dallas Federal Reserve, has expressed his feelings to reduce the monthly purchases: “I have been advocating for tapering of asset purchases. I think we should be adjusting that… We are not going to go like that forever.” (Source: Dokoupil, M. and Carvalho, S., “Fed’s Fisher Repeats Call to Reduce Bond Buying,” Reuters, March 26, 2013.) As many of you know, I have been pushing my belief that the Federal Reserve needs to clamp down on the flow of easy money.

If the Federal Reserve continues to support this artificial economy, held up by cheap interest rates, then we will likely see problems ahead when rates begin to rise. It’s inevitable; it will happen and those with massive amounts of debt accumulated during the period of easy money will be facing much higher financing costs. Of course, if consumers go into default, we could see a debt bubble emerging across America, and that’s not good.

So the Federal Reserve should look to scale back on its bond purchases and let interest rates steadily rise; otherwise, we could be in for some chaos. When this happens, you should begin to add to your bond exposure as yields begin to ratchet higher.